The opening and concluding parts of the report of the Adi Godrej Committee, appointed by the Ministry of Corporate Affairs in 2012, are a good summary of the state of corporate governance in the country: “The lacuna in Indian corporate governance is arguably not what is missing in the letter of the law, but what is missing in the internalisation and implementation of it.”

The concluding part states: “The real issues that determine the quality of corporate governance are issues of principle. Only a law or rule may not be an effective measure. This is the right time for corporate India to look inward and improve its own corporate governance, moving it beyond regulatory compliances to better oversight.”

India clearly scores well on all parameters that corporate governance ranking methodologies consider, but it hasn’t been able to prevent governance mishaps. This suggests that there is need and scope to improve corporate governance framework.

The role of the regulator in improving corporate governance is critical because the Indian ethos requires regulatory push to change compliance behaviour. Listing regulations brought about several changes in corporate governance quality, and compliance levels are now around 90 per cent. Clearly, one more push from the regulator,SEBI, in the form of formulating corporate governance standards will help in meeting the deficit observed in the Godrej Committee report.

There may be a million companies registered, but the 5,000-plus listed companies matter the most in terms of economic, commercial and public impact. Therefore, it is enough if the regulators address corporate governance quality in these listed companies. Higher corporate governance standards in listed companies will motivate unlisted companies aspiring to get listed to improve their standards.

The diversity of governance response can be attributed to factors (only illustrative) like ownership structure, power balance in the board between independent directors and executive directors, age/vintage of the business entity, size, geographical spread, cash flow/profitability and extent of certainty therein, etc.

Skewness in corporate governance can be attributed to domination of chairperson, character and value system of managing director/chairperson, ‘entitlement syndrome’ and managerial attitudes, belief that compliance with regulations is compliance officers’ duty, and belief that governance is a compliance process and has nothing to do with corporate character. It is seen that the need for accounting standards arises out of diverse practices in implementing accounting policies that not only hamper comparability but also question the reliability of financial statements. Even in corporate governance, there are diversities that are so intense that every corporate response to any governance event is viewed with suspicion and cynicism by stakeholders. This can be well-handled if “corporate governance standards” are set through a rigorous process.

This is not difficult to achieve. SEBI only needs to follow the process it used for setting Accounting Standards.

SEBI must take the lead

SEBI’s LODR (Listing Obligations and Disclosure Requirements) contains all the relevant principles around good CG. The enforcement mechanism prescribed under LODR assure compliance with ‘form’ of CG. The next step is to facilitate adherence with ‘substance’ of corporate governance. Principles are broad statements of regulatory intent whereas corporate governance standards will help translate the principles into standard corporate responses. CG standards based on the principles given in LODR will guide corporate India towards higher levels of corporate governance.

SEBI has, in fact, already set the tone for prescribing corporate governance standards. SEBI keeps issuing circulars prescribing governance expectations whenever governance deficit is observed. The experience gained with implementation of LODR has enabled SEBI to have a fairly good understanding of corporate responses to different governance events. What is required is to consolidate these observations and regulatory responses to evolve a “Corporate Governance Standards Agenda”. Once the agenda is prepared, the process follows.

The essential difference between a ‘rule’ and a ‘standard’ is that the former sets up the form of compliance by stipulating ‘what’ and ‘how’ aspects whereas a ‘standard’ suggests the ‘most desirable’ response to governance dilemma. A ‘standard’ shall help corporates in resolving any dilemma or afford the clarity on how should the corporate respond to a governance event.

The utility and effectiveness of corporate governance standards will be further enhanced if during the course of secretarial audit, governance events and corporate responses are verified against the standards. Corporate governance standards once set may also become an acceptable measure for identifying the great from the good, good from the bad, and the bad from the ugly. Over a period of time, if well pursued through appropriate regulatory framework, ‘ugly’ may transform into ‘great’. It is expected that corporate governance standards will help corporates in determining ‘right’ responses to a complex governance event.

Corporate governance standards may require review periodically. However, the issue is whether the corporate response to the complex governance event is resulting in doing the right things, at the right time, for the right reasons, and in the right manner. SEBI looks ideally poised to take up the pioneering initiative and earn India the pride of being the first country to issue “Corporate Governance Standards” in the world.

Narasimhan is Dean at National Institute of Securities Markets, and Ananthasubramanian is former President of Institute of Company Secretaries of India

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